ANALYSIS: Memo to Congress: Make jobs, not work

ANALYSIS/OPINION:

Time after time, Congress has used a recession to revive bad ideas, based on bad history. Meanwhile, good ideas of proven utility go overlooked.

The latest bad idea circulating in Washington is that Congress can “create” jobs that otherwise wouldn’t exist.

How? By “borrowing” people’s savings, or just taking their cash in taxes, and using it to hire other people.

This simple notion now fuels a raft of new proposals for “jobs” bills. Politicos blithely assume that, just by spending money on new roads and bridges, Washington will add to the total number of jobs in America.

I lived where that theory was put to the test for decades: in Britain during the 1950s, ‘60s and ‘70s. The prevailing view then was that the secret to economic growth was for Parliament to take money from one group of people and use it to hire people to do things (like building roads, bridges and ships). The actual result? One of the slowest-growing economies in the West.

The problem was that, when government took money away from the people, they no longer had it to buy things or to invest in factories and equipment. Turns out, government merely transferred jobs from one place to another - losing many along the way. Government is simply not a very efficient middleman.

Unfortunately, we occasionally fall into the same zero-sum game here. In virtually every recession, Congress has enacted British-style infrastructure “job-creation” programs that have subsequently proved to produce few, if any, net new jobs.

But there is one way government actually can create additional jobs (beyond those that would have been created in any case). That’s by establishing an environment that encourages those with savings to use their money to finance new businesses that employ people. How do you create such an environment? By reducing the red tape and tax costs of investing in job-creating firms.

In the 1980s, that simple fact led Margaret Thatcher’s government to come up with the idea of “enterprise zones” for high-unemployment areas. In these zones, the government made it simpler to start a business, and it cut taxes on those who invested. The zones boomed. It was like Hong Kong on the Thames.

Modest versions of enterprise zones were established in depressed areas of some American cities. But now is the time to enact an idea championed by former Housing and Urban Development Secretary Jack Kemp, an enterprise-zone booster since his days in Congress. Mr. Kemp’s vision was to establish just one enterprise zone - but one that would stretch from the Atlantic to the Pacific and between the Canadian and Mexican borders.

As Mr. Kemp argued, there are two keys to encouraging net new businesses that add to total jobs. The first is to cut or eliminate the capital-gains tax on investments in small businesses. The second is for state and local governments to streamline red tape: the zoning requirements, permitting requirements and other rules that add time and costs to the process of starting a business.

Why the focus on small businesses, such as subchapter S corporations or sole proprietors? Because they are the primary job creators in the economy. Larger firms tend to grow more slowly, even in good times.

Capital-gains relief is critical for these small firms because their startup money typically comes from investors, not from banks. These investors are willing to take more risks and look for capital growth, rather than dividends or interest.

So eliminating capital-gains taxes encourages them to take a chance on higher-risk small firms - the best job creators - rather than concentrate mainly on slower-growth but relatively safer large firms.

Story Continues →